跨国公司财务管理基础 (5)

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TEXAS TECH UNIVERSITY

RAWLS COLLEGE OF BUSINESS AREA OF FINANCE

FIN 4328 – 001– 62167 – International Finance Dr. Danışoğlu

Homework #5

Due on Tuesday, August 7, 2012

SECOND SUMMER 2012



1. Suppose that Zimbabwe has a choice of two possible $100 million, five-year Eurodollar loans. The first loan is offered at LIBOR + 1% with a 2.5% syndication fee, whereas the second loan is priced at LIBOR + 1.5% and a 0.75% syndication fee. Assuming that Zimbabwe has a 9% cost of capital, which loan is preferable? Hint: View this as a capital budgeting problem.

The dollar cash flows associated with these two spread-syndicate fee combinations are as follows:

Loan Option Fee Interest Spread (Years 1-5)

Loan 1 (2.5% fee, 1% spread) $2,500,000 $1,000,000 Loan 2 (0.75% fee, 1.5% spread) $750,000 $1,500,000



Using a 9% discount rate, we can compare the present values of these two combinations: 5 $1,000,000

$2,500,000 +  = $6,389,651 t

t=1(1.09)

Based on these comparisons, we can see that at a 9% discount rate, the first loan fee-spread combination is the least expensive one.

5

$1,500,000

$750,000 +  = $6,584,477

t

t=1(1.09)


2. During 1997, the Korean Stock Exchange’s composite index fell by 42%, while the won lost half its value against the dollar. What was the combined effect of these two declines on the dollar return associated with Korean stocks during 1997?

According to these data, the dollar return on the Korean Stock Exchange during 1997 was -71%:



R$ = (1 - 0.42)(1 - 0.5) - 1 = -71%



3. Suppose over a ten-year period the annualized peseta return of a Spanish bond has been 12.1%. If a comparable dollar bond has yielded an annualized return of 8.3%, what cumulative devaluation of the peseta over this period would be necessary for the return on the dollar bond to exceed the dollar return on the Spanish bond?

The answer to this question can be found by solving the following equation: (1.121)10(1 - d) = (1.083)10

In this equation, d is the cumulative peseta devaluation over the ten-year period. That is, the dollar return on investing in the Spanish bond equals the dollar return on investing in the comparable dollar-denominated bond. The solution to this equation is d = 0.2917, or a cumulative peseta devaluation of 29.17%.

4. The standard deviations of U.S. and Mexican returns over the period 1989-1993 were 12.7% and 29.7%, respectively. In addition, the correlation between the U.S. and Mexican markets over this period was 0.34. Assuming that these data reflect the future as well, what is the Mexican market beta relative to the U.S. market?

Using the formula presented in the text, and substituting in the numbers in the problem, we have the following: Standard deviation

Mexican marketCorrelation withof Mexican market0.297 = x = 0.34 x = 0.80

betaU.S. marketStandard deviation of U.S. market0.127



In other words, despite the much greater riskiness of the Mexican market relative to the U.S. market, the low correlation between the two markets led to a Mexican market beta (0.80) which is lower than the U.S. market beta (1.00).

5. In an attempt to diversify your portfolio internationally, you must decide how to invest in Brazil. You can invest in an index fund that replicates the Brazilian stock market, or you can buy shares of the Brazil Fund traded on the New York Stock Exchange. The correlation between the dollar returns on the index fund and the S&P 500 is 0.285; the correlation between the dollar returns on the Brazil Fund and the S&P 500 is 0.40; the standard deviation of the S&P 500 index is 0.19, the standard deviation of the index fund is 0.38, the standard deviation of the Brazilian fund is 0.4085. Also, the beta of the Brazil Fund with respect to the Brazilian index is 0.90. In addition, the Brazil Fund and the Brazilian index are expected to yield annual dollar returns of 21% and 19%, respectively, in contrast to expected annual returns of 18% from investing in the S&P 500. Assume that the U.S. Treasury bill rate is 5%. Ignoring other considerations, should you buy the Brazil Fund or the Brazilian index fund?

To answer this question, we need to determine which investment provides a better risk-return trade-off in the context of the U.S. market, which is represented here by the S&P 500. This means that we must calculate the beta for the Brazilian index with respect to the S&P 500, ßBrazilian index, and the corresponding beta for the Brazil Fund, ßBrazil Fund (the Brazil Fund’s beta relative to the Brazilian index is irrelevant).

By definition, ßBrazilian index = (0.285)(0.38)/0.19= 0.57, and ßBrazil Fund = (0.40)(0.4085)/0.19 = 0.86.


Given these betas and the 5% Treasury bill rate, the CAPM predicts an expected return on the Brazilian index of 5% + 0.57(18% - 5%) = 12.43% and an expected return on the Brazil Fund of 5% + .86(18% - 5%) = 16.14%.

Given their actual expected returns 19% and 21%, respectively, both investments appear to offer excess risk-adjusted returns, but the excess return for the Brazilian index of 6.57% (19% - 12.43%) exceeds the Brazil Fund’s excess return of 4.86% (21% - 16.14%). Hence, the Brazilian index fund appears to provide a better risk-return trade-off than the Brazil Fund.

6. IBM is considering having its German affiliate issue a 10-year, $100 million bond denominated in euros and priced to yield 7.5%. Alternatively, IBM’s German unit can issue a dollar-denominated bond of the same size and maturity and carrying an interest rate of 6.7%.

a. If the euro is forecast to depreciate by 1.7% annually, what is the expected dollar cost of the euro-denominated bond? How does this compare to the cost of the dollar bond?

Since IBM would be paying back principal plus interest in a currency that is depreciating, this should have a decreasing impact on the cost of the loan from the US parent’s point of view.

Dollar cost of the loan = [ (1 + 0.075) ( 1 + (-0.017)) ] – 1 = 5.67%. This figure is substantially below the 6.7% cost of borrowing dollars.

b. At what rate of euro depreciation will the dollar cost of the euro-denominated bond equal the dollar cost of the dollar-denominated bond?

Dollar cost of the loan = 0.06 = [ (1 + 0.075) ( 1 + x) ] – 1

x = -0.0074 or -0.74%.

c. Suppose IBM’s German unit faces a 35% corporate tax rate. What is the expected after-tax dollar cost of the euro-denominated bond?

When IBM pays back the loan, the interest payments made on the loan are going to be tax-deductable. Therefore, we have to consider the interest repayments and the principal repayment separately:

After-tax dollar cost of the interest repayment = (0.075) x (1 – 0.35) x (1 – 0.017) = 0.0479 Dollar cost of the principal repayment = [1 x (1 – 0.017) ] – 1 = -0.017

Total after-tax dollar cost of the loan = 0.0479 + (-0.017) = 0.0309 or 3.09%

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